Core Viewpoint - Traders are observing the highest level of term premium since 2014, indicating a new world order characterized by increased uncertainty, which is expected to keep term premiums elevated [1] Group 1 - The term premium, described as an additional buffer, is currently at its highest level since 2014 [1] - Jack McIntyre, who manages $63 billion in assets at Brandywine, suggests that even if there are concessions on tariffs from Trump, the level of uncertainty will continue to rise [1] - This rising uncertainty implies that the term premium will remain high [1]

Core Viewpoint - The article discusses the significant increase in trade policy uncertainty in the U.S. under the Trump administration, highlighting the potential economic repercussions and the political maneuvers that have led to this situation [1][2]. Group 1: Trade Policy Uncertainty - The U.S. "Trade Policy Uncertainty Index" surged to 5735 in March, which is 29 times higher than the level before the presidential election in October 2024, and three times higher than the previous record in August 2019 [1]. - The uncertainty is attributed to Trump's fluctuating tariff policies, which are creating a highly opaque economic outlook [1]. Group 2: Political Maneuvering - Trump has invoked the International Emergency Economic Powers Act (IEEPA) to declare a state of emergency regarding tariffs, allowing him to bypass Congress and manipulate tariff rates and targets freely [2]. - The number of presidential orders issued by Trump has exceeded 100 within three months, significantly higher than the 29 orders issued during his first term [2]. Group 3: Market Reactions - The Dow Jones Industrial Average dropped by 13% in April compared to the end of 2024, while the STOXX600 index fell by 7% after an initial rise of 11% [2]. - The VIX, known as the "fear index," surpassed 50 on April 8, marking the highest level since the 2008 financial crisis, excluding the COVID-19 pandemic period [2]. Group 4: Economic Impact - Following the initiation of reciprocal tariffs on April 9, there was a simultaneous sell-off in stocks, the dollar, and U.S. Treasury bonds, indicating a broader market panic [3]. - The yield premium demanded by investors for U.S. Treasury bonds reached its highest level since September 2014, suggesting a loss of confidence in U.S. bonds as a safe asset [3]. Group 5: Public Sentiment and Global Implications - Trump's average approval rating was 46.5% as of April 18, which, despite a decline from over 50%, remains relatively high [4]. - A survey indicated that 75% of researchers are considering leaving the U.S. due to the current administration, while the EU is exploring trade agreements to maintain a free trade system without the U.S. [4].

Core Viewpoint - The scale of basis arbitrage trading by hedge funds in the U.S. Treasury market has reached a historic high of $1 trillion, raising concerns among financial experts about the potential for a financial crisis [1][4]. Group 1: Basis Arbitrage Trading - Hedge funds have been utilizing the small price differences between U.S. Treasury cash and futures to engage in basis arbitrage, which involves going long on Treasury securities while shorting Treasury futures [6]. - The current scale of basis arbitrage trading has doubled since 2020, indicating a significant increase in risk exposure [4]. - The leverage ratio for hedge funds engaged in this trading has risen from 6.3 times to a record 7.8 times over the past year [7]. Group 2: Market Risks and Implications - The inherent leverage ratio for long cash and short futures positions is approximately 20 times, while the leverage on Treasury repo has surged to 56 times [8][10]. - Experts warn that a relatively small change in interest rate spreads could force hedge funds to liquidate their positions, potentially leading to widespread asset sell-offs [10][12]. - The resolution of the debt ceiling issue could trigger significant market volatility, as it would allow the U.S. Treasury to issue previously restricted bonds, leading to a sudden increase in supply [13][14]. Group 3: Proposed Solutions - Experts suggest that the Federal Reserve should consider a "hedged purchase" strategy instead of traditional quantitative easing (QE) to mitigate risks associated with high-leverage hedge funds [15][16]. - The proposed "hedged purchase" would involve the Fed buying U.S. Treasuries while simultaneously selling an equivalent amount of futures contracts to avoid distorting the term premium [16][20]. - This approach aims to provide a mechanism for high-leverage hedge funds to exit their positions without exacerbating market instability [17][19].